MARKET WATCH: Crude, natural gas prices climb

The front-month crude contract inched up 0.2%, Dec. 3 in the New York market despite a decline in the stock market following an unexpected contraction in the US Purchasing Managers Index (PMI) in November. The front-month natural gas contract was up 0.8% on forecasts of cooler weather.

“While the manufacturing data in the US was poor, its Chinese counterpart was in better shape, expanding for the first time in 13 months,” said analysts in the Houston office of Raymond James & Associates Inc., citing the Hong Kong & Shanghai Banking Corp. Ltd. (HSBC) Flash Purchasing Manager Index, The Oil Service Index and the SIG Oil Exploration & Production Index dropped 0.3% and 0.2%, respectively.

“On the surface, the headline numbers [of the US and the Chinese PMIs] appear to paint a different picture for the two economies and their implied commodity demand,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “Pessimism over the US is obvious; however, we would caution about getting too optimistic about China and the future of commodity demand from that country.”

He said, “China’s official PMI for manufacturing increased from 50.2 in October to 50.6, the strongest reading since April, and marking a second month of expansion, albeit relatively anemic. Subcomponents of the index show domestic demand has stabilized, although it remains fragile. Of particular encouragement were new export orders, which rose above the 50 threshold for the first time since May. This was corroborated by the overall HSBC PMI (weighted towards smaller export-orientated firms), which also pushed above 50. Indeed, the export subcomponent of the HSBC index also grew impressively from 46.7 in October to 52.4 in November.”

Although the Chinese economy apparently is recovering or at least stabilizing, not all sectors are progressing equally. Ground said, “While exports and manufacturing are improving, these sectors constitute a relatively small portion of China’s total commodity demand. Key for stronger commodity demand growth remains the construction sector (especially residential and commercial construction). While we continue to see growth in this sector, we struggle to see construction growing at the same rate it did between 2009 and 2012 anytime soon. As a result, we may not see physical buying activity in commodities with large exposure to construction (the bulk of overall Chinese commodity demand in the past) pick up substantially, even if economic growth in China improves.”

US manufacturing activity dipped below the 50 threshold in November to 49.5 after 2 months of moderate expansion. “Some of the blame for the dip can be placed on the effect of Hurricane Sandy,” Ground said. “However, uncertainty over the fiscal cliff is also a contributing factor. We saw in last week’s downward revisions of US personal consumption and business investment numbers that the US economy remains fragile, with the uncertainty surrounding the fiscal cliff appearing to have weighed on consumer and business confidence in the third quarter already. This drag on the US economy will no doubt have intensified in the fourth quarter.”

Among commodities, a fragile US economy will have the greatest impact on crude. “However, the indirect effect on China’s nascent improvement in exports and manufacturing could also have negative implications for commodity demand, especially in light of a Euro-zone economy that will most likely remain weak in 2013,” said Ground.

Energy prices

The January contract for benchmark US sweet, light crudes rose 18¢ to $89.09/bbl Dec. 3 on the New York Mercantile Exchange. The February contract increased 20¢ to $89.69/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 18¢ to $89.09/bbl.

The new January front-month heating oil contract, however, dipped 0.45¢ to $3.06/gal on NYMEX. Reformulated stock for oxygenate blending for the same month slipped 0.38¢ to $2.73/gal.

The January natural gas contract gained 3¢ to $3.59/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., lost 4.4¢ to $3.44/MMbtu.

In London, the January IPE contract for North Sea Brent declined 31¢ to $110.92/bbl. Gas oil for December decreased 50¢ to $949.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down 15¢ to $108.44/bbl.